Fed Raises Rates 25 Basis Points to 3.75%-4% for First Time Since 2023, Signals One More Hike This Year

The Federal Reserve unanimously raised its benchmark interest rate by 25 basis points to a target range of 3.75%-4% on September 16, marking its first rate increase in three years and ending the longest policy pause since 2008. The 12-0 vote, described as defying President Trump's calls for a cut, was accompanied by an updated dot plot signaling one additional 25 basis point hike before year-end, with 12 of 18 officials projecting rates at 4.1% by the end of 2026, four seeing two more hikes, and only two expecting no further increases.

Fed Chair Kevin Warsh cited three developments since the July meeting that shifted the outlook: a stronger economy and labor market, inflation failing to improve sufficiently, and a changed assessment of geopolitical risks. "The plain fact is that inflation is too high and has been for too long," Warsh said, noting that summer data gave him "very little" reason to ease concerns and that too many categories are posting price increases above 3% on both six- and twelve-month measures. The FOMC statement dropped its earlier characterization of elevated inflation as partly owing to supply shocks, a notable shift in tone.

The updated economic projections reflected a more hawkish longer-term path. The median fed funds rate forecast rose to 4.1% at end-2026 and end-2027, up from 3.8% and 3.6% respectively in June, with the 2028 median at 3.9% versus a prior 3.4%. The longer-run neutral rate was revised up to 3.2% from 3.1%. The Fed also lifted its 2026 PCE inflation forecast to 3.7% from 3.6% and its core PCE forecast to 3.4% from 3.3%, while marking down the unemployment projection to 4.1% from 4.3% and nudging GDP growth up to 2.3% from 2.2%.

Warsh attributed rising bond yields to three factors: economic strength, intense competition for capital as AI-driven capital expenditure surges, and geopolitical risks. He stated the Fed does not believe it needs to damage the labor market to achieve price stability, calling current financial conditions not restrictive, a view widely shared across the FOMC. Traders, reading the press conference as more hawkish than the dot plot alone, increased bets on two more hikes by year-end, with money markets pricing roughly a 50% chance of an October move.

Markets sold off sharply in response. The Dow Jones Industrial Average fell as much as 700 points during Warsh's press conference before settling down roughly 600 points, while the S&P 500 dropped approximately 0.45%. The US dollar surged, with the DXY posting its best day since Warsh's first press conference in June, EUR/USD breaching 1.1500, and USD/JPY pushing above 156. Gold fell to fresh one-month lows. Bitcoin initially spiked on the announcement but reversed, trading near $75,700 before pulling back as the hawkish guidance weighed on risk assets.